Decline in consumer and wholesale inflation fuels hopes of rate cut by RBI

NEW DELHI: A sharp decline in the consumer inflation and still negative wholesale inflation in February raised expectations of a rate cut by the Reserve Bank of India amid disappointing industrial growth and the government staying the course on fiscal consolidation.

India’s headline inflation rate based on the Consumer Price Index (combined) eased to 5.18 per cent in February compared with 5.69 per cent in January and 5.37 per cent a year ago, data released by statistics office showed.

Data released by the commerce department showed India’s wholesale prices fell for the 16th straight month in February, with the Wholesale Price Index declining 0.91 per cent from that a year ago after the 0.90 per cent fall recorded in the previous month.

Economists did not rule out the possibility of the RBI cutting interest rates by at least 25 basis points even before the bi-monthly monetary policy review, which is scheduled for April 5, taking a cue from governor Raghuram Rajan who had expressed disappointment with the industrial growth numbers. Industrial growth contracted for the third month running in January, declining 1.5 per cent from a year ago, data released on Friday showed.



The government has also done its bit for further monetary relaxation, adhering to the fiscal consolidation roadmap in the Budget presented on February 29 despite demand for relaxing the goals to create room for higher public spending. The fiscal deficit target for next financial year is 3.5 per cent compared with 3.9 per cent in the current year. "The stage is set for a 25 bps rate cut. The CPI number is better than expectations and that is positive as far as the rate cut is concerned," said Sunil Kumar Sinha, principal economist at India Ratings & Research, a Fitch Ratings associate.

The economy is forecast to grow 7.6 per cent in the current year largely on the strength of strong urban demand and government capital spending. A rate cut is expected to stimulate demand. "While an inter-meeting cut can't be ruled out, that is not our baseline expectation," said Aditi Nayar, senior economist, ICRA Ltd, pencilling in a 25 basis point rate cut in April.